China's property sector remains sluggish

Transport authorities project that 1.94 billion trips will be made during this year's holiday week, a slight increase from last year and nearly 20 percent higher than 2019 levels.

By Michalis Voutsinas

Three years ago, the last trading week of September saw Hong Kong's stock market tumble as the liquidity crisis at Chinese property giant Evergrande started rippling beyond the real estate sector. That shockwave extended across global markets, triggering a sell-off in Asia that reached European bourses, with futures indicating a sharp drop in New York markets. By the time Wall Street opened, the S&P 500 had already plummeted by 2.9 percent, closing down 1.7 percent – the steepest drop since May 2021. Commodities like iron ore and copper also slumped, reflecting concerns that the potential collapse of one of China’s largest developers could choke off construction demand and weaken appetite for raw materials. Fears of a so-called "Minsky Moment" – a major collapse of asset values – loomed large, driving the CBOE volatility index, the "fear gauge," to its highest level in months.

Fast forward to today, thirty-six months later, and while the drastic crash of a "Minsky Moment" hasn't fully materialized, China's property sector remains sluggish, still grappling with the aftershocks of Evergrande’s near-collapse. Recent moves by the Chinese government underscore how precarious the situation remains. Last week, Beijing stepped up efforts to revive its struggling property market with fresh directives for commercial banks to slash mortgage rates, providing annual savings of 150 billion yuan (about 21.4 billion US dollars) for borrowers. Additionally, down payments for second home purchases were reduced in an effort to reignite property buying. According to Pan Gongsheng, governor of the People’s Bank of China, rates on existing homes would be cut by 50 basis points, and down payments for second homes would match those for firsttime buyers, signalling an aggressive stance to spur demand.

In tandem, several of China’s largest cities loosened property restrictions, building on Beijing’s biggest stimulus package since the pandemic. Guangzhou, the provincial capital of Guangdong, announced it would eliminate all homebuying restrictions, while Shanghai and Shenzhen, two of China’s most important financial and tech hubs, relaxed rules on home ownership for non-locals. Both cities unveiled their policies just ahead of the week-long National Day holiday. These relaxed measures are designed to breathe life back into China’s property sector, which has been in the doldrums for over four years.

As of October 1, non-local residents in Shanghai and Shenzhen can more easily purchase homes, as the threshold for eligibility has been lowered. Where buyers once needed to show three years of tax payments in Shanghai or five years in Shenzhen, the new rule requires just 12 months. Furthermore, both cities are cutting the capital gains tax on homes held for more than two years, down from the previous five-year rule, a move aimed at encouraging property transactions. First-time buyers in Shanghai will now only need a 20 percent down payment, reduced from 30 percent, while secondhome buyers will see their down payment cut to 25 percent, down from 35 percent.

As the National Day holiday kicks off, domestic investors are riding high, with mainland stock markets surging and closing the final trading day in bull territory. The holiday is traditionally a time of increased consumer spending, a key gauge of economic health in the world’s second-largest economy. This year, however, the stakes are even higher, as analysts scrutinise whether President Xi Jinping’s latest stimulus efforts can breathe new life into consumer sentiment and spending.

Transport authorities project that 1.94 billion trips will be made during this year's holiday week, a slight increase from last year and nearly 20 percent higher than 2019 levels. According to Vice-Minister of Transport Li Yang, 80 percent of these journeys will be taken by car, with the remaining 20 percent by trains, buses, planes, and ships. Rail travel is set to play a significant role, with over 175 million passengers expected to use the network from Sunday to next Tuesday, marking Tuesday as the peak day with over 21 million journeys. Shanghai-based travel agency Trip.com predicts recordbreaking tourism expenditures this week, thanks to reduced prices for hotels and flights. Meanwhile, state media outlets are enthusiastically reporting on "record" figures across various sectors, including cinema ticket sales, railway traffic, and road trips.

The expected surge in domestic tourism this week comes as China's broader travel activity for the first three quarters of 2024 has significantly increased. According to a top official from the Ministry of Culture and Tourism, China anticipates 4.29 billion domestic trips by the end of the third quarter, a 16.8 percent rise compared to the same period last year. Tourism revenues for the same period are also projected to climb by 17.1 percent year on year, reaching 4.32 trillion yuan (approximately $615.6 billion). Inbound passenger trips are also expected to grow sharply, up by 55.4 percent year on year, totaling 95 million.

Despite an anticipated surge in travel and the upbeat atmosphere, markets – including the dry bulk freight sector – are still awaiting a comprehensive view of China’s holiday spending data. While the initial indicators of consumer confidence are positive, the sustainability of this optimism remains in question. The effectiveness of recent government stimulus measures, especially in revitalizing the property sector, will be key in determining whether this momentum can carry through the remainder of the year. Given China's pivotal role in global trade and commodity demand, dry bulk market will be watching these developments closely, looking for signals of sustained economic recovery.

Data source: Doric